Chapter 1 Accruals and Prepayments: Required

Chapter 1 Accruals and Prepayments
QUESTION 1
The following balances were extracted from the ledgers of K Hook’s business as at 31 March 2010:
$
Rent 23,400 Dr
Insurance 5,500 Dr
Loan from Peter 20,000 Cr
Commission revenue 3,500 Cr
The following additional information was ascertained:

(i) Two months’ rent totalling $4,680 was due but not yet paid.
(ii) Insurance included:

Building insurance of $1,100 for 12 months ended 31 March 2010.
Motor insurance of $4,400 for 12 months ended 31 July 2010.
(iii) The loan from Peter was borrowed on 1 April 2009, with an interest rate of 12% per annum. Only the
interest for the first half of the year was paid.
(iv) Commissions of $1,500 were received for services to be provided in April 2010. This sum was
included in the commission revenue account.
Required:
(a) Explain the meaning of accruals. (1.5 marks)
(b) Write up the above ledger accounts and show the transfer to the profit and loss account. (8 marks)
(c) Prepare an income statement extract for the year ended 31 March 2010. (2 marks)
(d) Prepare for Mr Hook a balance sheet extract as at 31 March 2010 to show the accruals and
prepayments. (2.5 marks)
Answer:
(a) Accruals are expenses/revenues that have been incurred/earned during a period but have not been
paid/received by the end of that period. (1.5 marks)
(b)
Rent
2010 $ 2010 $
Mar 31 Balance b/d 23,400 Mar 31 Profit and loss 28,080 0.5 0.5
“ 31 Accrued c/f 4,680 0.5
NSS BAFS: Frank Wood’s Financial Accounting 1 1 © Pearson Education Asia Limited 2010
Question Bank
28,080 28,080
2010
Apr 1 Accrued b/f 4,680 0.5
Insurance
2010 $ 2010 $
4
“ 31 Prepaid c/f ($4,400  12 ) 1,467 0.5
5,500 5,500
2010
Apr 1 Prepaid b/f 1,467 0.5
Loan Interest
2010 $ 2010 $
“ 31 Accrued c/f 1,200 0.5
1
($20,000  12%  2 ) 2,400 2,400
2010
Apr 1 Accrued b/f 1,200 0.5
Commission Revenue
2010 $ 2010 $
Mar 31 Profit and loss 2,000 Mar 31 Balance b/d 3,500 0.5 0.5
“ 31 Prepaid c/f 1,500 0.5
3,500 3,500
2010
Apr 1 Prepaid b/f 1,500 0.5
(c)
K Hook
Income Statement for the year ended 31 March 2010 (extract)
$ $
Rent 28,080 Commission revenue 2,000 0.5 0.5
Insurance 4,033 0.5
Loan interest 2,400 0.5
(d)
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K Hook
Balance Sheet as at 31 March 2010 (extract)
$ $
Current assets Current liabilities 0.5 0.5
Prepaid expenses 1,467 Accrued expenses ($4,680 + $1,200) 5,880 0.5 0.5
Unearned revenues 1,500 0.5
QUESTION 2
The following balances were extracted from the books of Paul Mak, a sole trader, as at 1 January 2010:
$
Insurance 480 Dr
Rates 2,520 Dr
Rent 840 Cr
Telephone and Internet 508 Cr
Commission revenue 600 Dr
During the year, the following sums were paid or received by cheque.
2010 $
Jan 1 Payment of three months’ rent to 28 February 2010 2,520
“ 1 Receipt of three months’ commissions to 28 February 2010 1,800
Feb 1 Payment of one year’s insurance premiums to 31 January 2011 7,200
Mar 1 Payment of telephone and Internet expenses for the past three months 1,524
“ 1 Payment of three months’ rent in advance on a new rental contract 3,600
Apr 1 Payment of six months’ rates to 30 September 2010 6,480
Jun 1 Payment of telephone and Internet expenses for the past three months 1,752
“ 1 Rent payment 3,600
“ 30 Receipt of six months’ commissions to 31 August 2010 3,600
Sept 1 Payment of rent 3,600
“ 1 Payment of telephone and Internet expenses for the past three months 1,956
Oct 1 Payment of six months’ rates to 31 March 2011 6,480
Dec 1 Payment of telephone and Internet expenses for the past three months 2,208
“ 1 Rent paid 3,600
“ 31 Receipt of five months’ commissions to 31 January 2011 3,000
2011
Mar 1 Payment of telephone and Internet expenses for the past three months 2,004
Required:
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(a) Write up the above ledger accounts for the year ended 31 December 2010 and show the transfer to the
profit and loss account. (17.5 marks)
(b) Prepare an income statement extract for the year ended 31 December 2010. (2.5 marks)
(c) Explain the meaning of prepayments. (1 mark)
Answer:
(a)
Insurance
2010 $ 2010 $
Jan 1 Prepaid b/f 480 Dec 31 Profit and loss 7,080 0.5 0.5
1
Feb 1 Bank 7,200 “ 31 Prepaid c/f ($7,200  12 ) 600 0.5 0.5
7,680 7,680
2011
Jan 1 Prepaid b/f 600 0.5
Rates
2010 $ 2010 $
Jan 1 Prepaid b/f 2,520 Dec 31 Profit and loss 12,240 0.5 0.5
3
Apr 1 Bank 6,480 “ 31 Prepaid c/f ($6,480  6 ) 3,240 0.5 0.5
Oct 1 Bank 6,480 0.5
15,480 15,480
2011
Jan 1 Prepaid b/f 3,240 0.5
Rent
2010 $ 2010 $
Jan 1 Bank 2,520 Jan 1 Accrued b/f 840 0.5 0.5
Mar 1 Bank 3,600 Dec 31 Profit and loss 13,680 0.5 0.5
2
Jun 1 Bank 3,600 “ 31 Prepaid c/f ($3,600  3 ) 2,400 0.5 0.5
Sept 1 Bank 3,600 0.5
Dec 1 Bank 3,600 0.5
16,920 16,920
2011
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Telephone and Internet
2010 $ 2010 $
Mar 1 Bank 1,524 Jan 1 Accrued b/f 508 0.5 0.5
Jun 1 Bank 1,752 Dec 31 Profit and loss 7,600 0.5 0.5
Sept 1 Bank 1,956 0.5
Dec 1 Bank 2,208 0.5
1
Dec 31 Accrued c/f ($2,004  3 ) 668 0.5
8,108 8,108
2011
Jan 1 Accrued b/f 668 0.5
Commission Revenue
2010 $ 2010 $
Jan 1 Accrued b/f 600 Jan 1 Bank 1,800 0.5 0.5
Dec 31 Profit and loss 7,200 Jun 30 Bank 3,600 0.5 0.5
1
“ 31 Prepaid c/f ($3,000  5 ) 600 Dec 31 Bank 3,000 0.5 0.5
8,400 8,400
2011
Jan 1 Prepaid b/f 600 0.5
(b)
Paul Mak
Income Statement for the year ended 31 December 2010 (extract)
$ $
Insurance 7,080 Commission revenue 7,200 0.5 0.5
Rates 12,240 0.5
Rent 13,680 0.5
Telephone and Internet 7,600 0.5
(c) Prepayments are expenses/revenues that have been paid/received during a period but have not been
incurred/earned by the end of that period. (1 mark)
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QUESTION 3
Woody Chow started his business as a wholesaler on 1 January 2010. During the first year of business, the
following operating expenses were incurred:
(i) He rented an office in Tsim Sha Tsui for $600,000 per annum, payable quarterly at the end of March,
June, September and December.
Rates for the office, which totalled $3,000 per annum, were payable quarterly in advance until
31 March 2010. Starting from 1 April 2010, the rates increased by $1,000 per annum and were payable
yearly in advance. The following payments were made in 2010:
2010 $
Jan 1 750
Apr 5 4,000
(ii) Woody took out a six-month fire insurance cover on the office and paid the $1,300 premium on
1 January 2010. He later found that the cover was inadequate and upgraded it to a comprehensive
insurance plan as from 1 July 2010 for an annual premium of $8,800, payable in advance. He paid the
annual premium on 10 July 2010.
(iii) Water and electricity paid during the year totalled $8,000. Prepaid water expenses amounted to $200
and an accrual of $350 was made for electricity.
(iv) Other operating expenses paid during the year were $11,000 and $1,000 was accrued as at year end.
Required:
(a) Distinguish between accrual accounting and cash accounting. (3 marks)
(b) Show the following expense accounts for the financial year ended 31 December 2010, complete with
all the year-end adjustments and balances brought forward:
 Rent and rates
 Insurance
 Water and electricity
 Other operating expenses (12 marks)
(c) Prepare an income statement extract for the year ended 31 December 2010. It was determined that
Woody Chow’s business had earned a gross profit of $135,000 for the year. (3 marks)
Answer:
(a) Under cash accounting, revenues are recognised when received and expenses are recognised when
paid. Under accrual accounting, revenues and expenses are recognised when they are earned or
incurred. The main difference between cash accounting and accrual accounting lies in the treatment of
accruals and prepayments of expenses and revenues. (3 marks)
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(b)
Rent and Rates
2010 $ 2010 $
Jan 1 Bank 750 Dec 31 Profit and loss 603,750 0.5 0.5
Mar 31 Bank 150,000 “ 31 Prepaid c/f 1,000 0.5 0.5
Apr 5 Bank 4,000 0.5
Jun 30 Bank 150,000 0.5
Sept 30 Bank 150,000 0.5
Dec 31 Bank 150,000 0.5
604,750 604,750
2011
Insurance
2010 $ 2010 $
Jan 1 Bank 1,300 Dec 31 Profit and loss 5,700 0.5 0.5
6
Jul 10 Bank 8,800 “ 31 Prepaid c/f ($8,800  12 ) 4,400 0.5 0.5
10,100 10,100
2011
Water and Electricity

2010 $ 2010 $
Dec 31 Bank 8,000 Dec 31 Profit and loss 8,150 0.5 0.5
“ 31 Accrued c/f 350 “ 31 Prepaid c/f 200 0.5 0.5
8,350 8,350
2011 2011
Jan 1 Prepaid b/f 200 Jan 1 Accrued b/f 350 0.5 0.5
Other Operating Expenses

2010 $ 2010 $
Dec 31 Bank 11,000 Dec 31 Profit and loss 12,000 0.5 0.5
“ 31 Accrued c/f 1,000 0.5
12,000 12,000
2011
Jan 1 Accrued b/f 1,000 0.5
(c)
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Woody Chow
Income Statement for the year ended 31 December 2010 (extract)
$ $
Rent and rates 603,750 Gross profit b/d 135,000 0.5 0.5
Insurance 5,700 Net loss 494,600 0.5 0.5
Water and electricity 8,150 0.5
Other operating expenses 12,000 0.5
629,600 629,600
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QUESTION 4
The following revenues and expenses were received and paid by Larry & Co during 2010:
(i) Larry & Co rented a building as its office premises in 2008 for three years at a cost of $48,000 per
annum. In 2010, Larry & Co made the following payments relating to rent:
2010 $
Jan 8 Rent for the three months ended 28 February 2010 12,000
Mar 14 Rent for the three months ended 31 May 2010 12,000
Jun 2 Rent for the three months ended 31 August 2010 12,000
Oct 28 Rent for the three months ended 30 November 2010 12,000
(ii) Larry & Co sublet part of the building to three tenants:

Tenant A entered into a one-year tenancy agreement on 1 March 2010 and paid the whole year's rent of
$30,000 on 4 April 2010. Tenant B entered into a two-year tenancy agreement on 1 May 2010 and paid
rent of $14,400 quarterly in advance. The first four rent payments were made on 1 June 2010,
1 September 2010, 1 December 2010 and 1 March 2011. Tenant C paid $1,500 on 1 November 2010 as
rent for a conference room for 30 days from 1 February 2011 to 2 March 2011.
(iii) Rates:
Rates were paid quarterly in advance. Rates of $3,000 for the first quarter of 2010 were paid on
31 December 2009. During 2010, Larry & Co paid $15,300 for the remaining three quarters of rates.
Rates of $4,000 for the first quarter of 2011 were paid on 31 December 2010.
Required:
(a) Show the rent expense, rent income and rates accounts as they would appear in the ledgers of Larry &
Co for the year ended 31 December 2010. (11.5 marks)
(b) Prepare for Larry & Co a balance sheet extract as at 31 December 2010, showing both accruals and
prepayments. (2.5 marks)
Answer:
(a)
Rent
2010 $ 2010 $
Jan 8 Bank 12,000 Jan 1 Accrued b/f 4,000 0.5 0.5
Mar 14 Bank 12,000 Dec 31 Profit and loss 48,000 0.5 0.5
Jun 2 Bank 12,000 0.5
Oct 28 Bank 12,000 0.5
Dec 31 Accrued c/f 4,000 0.5
52,000 52,000
2011
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Jan 1 Accrued b/f 4,000 0.5
Rent Income
2010 $ 2010 $
Dec 31 Profit and loss 63,400 Apr 4 Bank 30,000 0.5 0.5
2
Jun 1 Bank 14,400
“ 31 Prepaid c/f [($30,000  12 ) 0.5
1
+ ($14,400  3 ) + $1,500] 11,300 Sept 1 Bank 14,400 1 0.5
Nov 1 Bank 1,500 0.5
Dec 1 Bank 14,400 0.5
74,700 74,700
2011
Rates
2010 $ 2010 $
Jan 1 Prepaid b/f 3,000 Dec 31 Profit and loss 18,300 0.5 0.5
Dec 31 Bank 15,300 “ 31 Prepaid c/f 4,000 0.5 0.5
“ 31 Bank 4,000 0.5
22,300 22,300
2011
(b)
Larry & Co
Balance Sheet as at 31 December 2010 (extract)
$ $
Current assets Current liabilities 0.5 0.5
Prepaid expenses 4,000 Accrued expenses 4,000 0.5 0.5
Unearned revenues 11,300 0.5
QUESTION 5
Sigma Chan, a sole proprietor, extracted the following trial balance from his books at the close of business
on 30 April 2011:
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$ $
Capital as at 1 May 2010 ? Returns inwards 1,592
Accounts receivable 7,250 Returns outwards 858
Accounts payable 1,380 Wages and salaries 6,202
5% bank loan (repayable in 2015) 3,000 Bank 1,570
Office furniture 1,466 Cash 146
Discounts allowed 1,424 Rates and insurance 564
Discounts received 586 Premises 12,574
Fixtures and fittings 1,256 Drawings 3,562
Purchases 19,804 Rent 250
Sales 34,224 Inventory at 1 May 2010 4,148
Inventory as at 30 April 2011 was valued at $6,440.
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Additional information:
(i) Prepaid wages amounted to $1,250.
(ii) Loan interest for the year was not paid.
(iii) Rent owing amounted to $1,790.
Required:
(a) Prepare a trial balance as at 30 April 2011. Calculate the capital account balance. (11 marks)
(b) Draw up an income statement for the year ended 30 April 2011. (8 marks)
(c) Draw up a balance sheet as at 30 April 2011. (7 marks)
Answer:
(a)
Sigma Chan
Trial Balance as at 30 April 2011
Dr Cr
$ $
Capital at 1 May 2010 21,760 0.5
Accounts receivable 7,250 0.5
Accounts payable 1,380 0.5
5% bank loan (repayable in 2015) 3,000 0.5
Office furniture 1,466 0.5
Discounts allowed 1,424 0.5
Discounts received 586 0.5
Fixtures and fittings 1,256 0.5
Purchases 19,804 0.5
Sales 34,224 0.5
Returns inwards 1,592 0.5
Returns outwards 858 0.5
Wages and salaries 6,202 0.5
Bank 1,570 0.5
Cash 146 0.5
Rates and insurance 564 0.5
Premises 12,574 0.5
Drawings 3,562 0.5
Rent 250 0.5
Inventory as at 1 May 2010 4,148 0.5
61,808 61,808 0.5 0.5
(b)
Sigma Chan
Income Statement for the year ended 30 April 2011
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$ $ $ $
Opening inventory 4,148 Sales 34,224 0.5 0.5
Add Purchases 19,804 Less Returns inwards (1,592 ) 32,632 0.5 0.5
Less Returns outwards (858 ) 18,946 0.5
23,094
Less Closing inventory (6,440 ) 0.5
Cost of goods sold 16,654 0.5
Gross profit c/d 15,978 0.5
32,632 32,632
Discounts allowed 1,424 Gross profit b/d 15,978 0.5 0.5
Wages and salaries ($6,202  $1,250) 4,952 Discounts received 586 0.5 0.5
Rates and insurance 564 0.5
Rent ($250 + $1,790) 2,040 0.5
Loan interest ($3,000 × 5%) 150 0.5
Net profit 7,434 0.5
16,564 16,564
(c)
Sigma Chan
Balance Sheet as at 30 April 2011
$ $ $ $
Non-current assets Capital
Premises 12,574 Balance as at 1 May 2010 21,760 0.5 0.5
Office furniture 1,466 Add Net profit for the year 7,434 0.5 0.5
Fixtures and fittings 1,256 15,296 29,194 0.5
Less Drawings (3,562 ) 0.5
Current assets 25,632
Inventory 6,440 Non-current liabilities 0.5
Accounts receivable 7,250 5% bank loan 3,000 0.5 0.5
Prepaid expenses 1,250 0.5
Bank 1,570 Current liabilities 0.5
Cash 146 16,656 Accounts payable 1,380 0.5 0.5
Accrued expenses 1,940 3,320 0.5
31,952 ($1,790 + $150) 31,952
QUESTION 6
Cyrus Lau is a confectionary retailer. The following trial balance was extracted from his ledgers on 31 March
2011:
Dr Cr
$ $
Rent and rates 3,440
Purchases and sales 46,830 89,700
Office furniture 5,985
Inventory as at 1 April 2010 10,695
Carriage inwards 700
Accounts receivable and accounts payable 27,380 10,170
Bank 7,780
Capital as at 1 April 2010 39,590
Delivery van 6,730
Discounts 2,165 545
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Returns 1,570 500
Sundry expenses 820
Wages and salaries 16,010
Rental income 5,000
Motor expenses 2,765
Drawings 12,415
Cash 220
145,505 145,505
(i) Inventory as at 31 March 2011 was valued at $9,250.
(ii) Sundry expenses of $300 were owing.
(iii) Rental income for the months of February and March 2011 at $2,000 per month was outstanding.
(iv) Van maintenance expenses were due but unpaid. The amount was equivalent to 10% of the cost of the
delivery van.
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Required:
(a) Draw up an income statement for the year ended 31 March 2011 and a balance sheet as at that date.
(15 marks)
(b) Compute the following ratios for Cyrus Lau's business at 31 March 2011.
(i) Gross profit ratio (iv) Current ratio
(ii) Net profit ratio (v) Quick ratio
(iii) Return on capital employed (5 marks)
(All calculations to 2 decimal places)
Answer:
(a)
Cyrus Lau
Income Statement for the year ended 31 March 2011
$ $ $ $
Carriage inwards 700 0.5
47,530
Less Returns outwards (500 ) 47,030 0.5
57,725
88,130 88,130
Rent and rates 3,440 Gross profit b/d 39,655 0.5 0.5
Discounts allowed 2,165 Discounts received 545 0.5 0.5
Sundry expenses ($820 + $300) 1,120 Rental income ($5,000 + $4,000) 9,000 0.5 0.5
Wages and salaries 16,010 0.5
Motor expenses [$2,765 + ($6,730  10%)] 3,438 0.5

49,200 49,200
Cyrus Lau
Balance Sheet as at 31 March 2011
$ $ $ $
Office furniture 5,985 Balance as at 1 April 2010 39,590 0.5 0.5
Delivery van 6,730 12,715 Add Net profit for the year 23,027 0.5 0.5
62,617
Current assets Less Drawings (12,415 ) 0.5
Inventory 9,250 50,202 0.5
Accrued rental income 4,000 Current liabilities 0.5
Bank 7,780 Accounts payable 10,170 0.5 0.5
Cash 220 48,630 Accrued expenses ($300 + $673) 973 11,143 0.5 0.5
61,345 61,345
(b) (i) Gross profit ratio: $39,655 ÷ $88,130 = 45.00% (1 mark)
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(ii) Net profit ratio: $23,027 ÷ $88,130 = 26.13% (1 mark)
(iii) Return on capital employed: $23,027 ÷ [($39,590 + $50,202) ÷ 2] = 51.29% (1 mark)
(iv) Current ratio: $48,630 ÷ $11,143 = 4.36 : 1 (1 mark)
(v) Quick ratio: ($48,630  $9,250) ÷ $11,143 = 3.53 : 1 (1 mark)
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QUESTION 7
Candy Ho is a florist owner. The following trial balance was extracted from her books on 31 March
2010.
Dr Cr
$ $
Capital as at 1 April 2009 71,180
Carriage inwards 330
Carriage outwards 376
Cash at bank 11,104
Cash in hand 1,903
Discounts allowed 3,138
Discounts received 4,104
Drawings 5,793
Electricity 964
Fixtures and fittings 21,206
Inventory as at 1 April 2009 28,245
Loan from Billy Chan (repayable in 2012) 14,480
Purchases 94,878
Rates 1,447
Rent 2,655
Repairs and maintenance 723
Returns outwards 1,445
Salaries 3,620
Sales 116,076
239,634 239,634
(i) Inventory as at 31 March 2010 was valued at $12,000.
(ii) Items prepaid: rent $400; electricity $250.
Accruals: rates $120; repairs $57.
(iii) 20% of the rent expenses were used for Candy's private purposes.
(iv) 10% loan interest was not provided for during the year.
Required:
(a) Draw up an income statement for the year ended 31 March 2010 and a balance sheet as at that date.
(16 marks)
(b) Compute the following ratios for Candy Ho's business.
(i) Gross profit ratio
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(ii) Current ratio
(iii) Quick ratio (3 mark)
(All calculations to 2 decimal places)
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Answer:
(a)
Candy Ho
Income Statement for the year ended 31 March 2010
$ $ $
Add Purchases 94,878 0.5
Carriage inwards 330 0.5
95,208
Less Returns outwards (1,445 ) 93,763 0.5
122,008
116,076 116,076
Carriages outwards 376 Gross profit b/d 6,068 0.5 0.5
Discounts allowed 3,138 Discounts received 4,104 0.5 0.5
Electricity ($964  $250) 714 Net loss 3,275 0.5 0.5
Rates ($1,447 + $120) 1,567 0.5
Rent [($2,655  $400) × 80%] 1,804 0.5
Repairs and maintenance ($723 + $57) 780 0.5
Salaries 3,620 0.5
Loan interest ($14,480 × 10%) 1,448 0.5
13,447 13,447
Candy Ho
Balance Sheet as at 31 March 2010
$ $ $ $
Fixtures and fittings 21,206 Balance as at 1 April 2009 71,180 0.5 0.5
Less Net loss for the year 3,275 0.5
Current assets Drawings [$5,793 + ($2,655
Inventory 12,000  $400) × 20%] 6,244 (9,519 ) 0.5 1
Accounts receivable 63,252 61,661 0.5
Prepaid expenses ($250 + $400) 650 Non-current liabilities 0.5
Bank 11,104 Loan from Billy Chan 14,480 0.5 0.5
Cash 1,903 88,909 0.5
Current liabilities
Accrued expenses 1,625 33,974 0.5
110,115 ($120 + $57 + $1,448) 110,115
(b) (i) Gross profit ratio: $6,068 ÷ $116,076 = 5.23% (1 mark)

(ii) Current ratio: $88,909 ÷ $33,974 = 2.62 : 1 (1 mark)
(iii) Quick ratio: ($88,909  $12,000) ÷ $33,974 = 2.26 : 1 (1 mark)
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QUESTION 8
Michael Lee, a sole proprietor, extracted the following trial balance from his books at the close of business
on 30 April 2009:
Dr Cr
$ $
Advertising 4,920
Bank 3,100
Capital 237,740
Carriage inwards 1,410
Carriage outwards 1,045
Delivery van at cost 17,850
Drawings 51,480
Water and electricity 5,350
Insurance 7,850
Interest on bank overdraft 140
Inventory at 1 May 2008 19,895
Premises at cost 159,380
Purchases 217,085
Rent expense and revenue 2,000 10,330
Repair expenses 5,925
Return of goods to suppliers 4,985
Sales 286,900
Telephone and Internet expenses 1,205
Returns inwards 750
Office equipment 49,000
551,695 551,695
(i) Inventory as at 30 April 2009 was valued at $3,719.
(ii) Items prepaid: telephone $600; electricity $390.

Accruals: rent revenue $3,200, repair expenses $150; carriage inwards $60.
(iii) It was agreed that one-tenth of the water and electricity expenses should be charged to Michael in
respect of private use.
(iv) Insurance consisted of: $

Motor insurance paid on 1 June 2008 for the period up to 30 April 2009 3,350
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Property insurance paid on 1 May 2008 for the three months ended 31 July 2008 900
Property insurance paid on 1 September 2008 for the 12 months ending 31 July 2009 3,600
7,850
(v) Rent of $1,600 had been paid for four months ending 31 July 2009.
Required:
Draw up a vertical-style income statement for the year ended 30 April 2009 and a balance sheet as at that
date. (16 marks)
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Answer:
Michael Lee
Income Statement for the year ended 30 April 2009
$ $ $
Sales 286,900 0.5
Less Returns inwards (750 ) 0.5
286,150
Less Cost of goods sold:
Opening inventory 19,895 0.5
Carriage inwards ($1,410 + $60) 1,470 0.5
218,555
233,465
Less Closing inventory (3,719 ) (229,746 ) 0.5
Gross profit 56,404 0.5
Add Other revenues:

Rent received ($10,330 + $3,200) 13,530 0.5
69,934
Less Expenses:
Advertising 4,920 0.5
Carriage outwards 1,045 0.5
9
Water and electricity [($5,350  $390)  10 ] 4,464 0.5
3
Insurance [$7,850  ($3,600  12 )] 6,950 0.5
Interest on bank overdraft 140 0.5
Repair expenses ($5,925 + $150) 6,075 0.5
3
Rent [$2,000  ($1,600  4 )] 800 0.5
Telephone and Internet expenses ($1,205  $600) 605 (24,999 ) 0.5
Michael Lee
Balance Sheet as at 30 April 2009
$ $ $
Non-current assets
Premises at cost 159,380 0.5
Office equipment 49,000 0.5
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Delivery van at cost 17,850 226,230 0.5
Current assets
Inventory 3,719 0.5
Accrued rent revenue 3,200 0.5
Prepaid expenses ($600 + $390 + $900 + $1,200) 3,090 0.5
16,419
Less Current liabilities:
Accrued expenses ($150 + $60) 210 0.5
Bank overdraft 3,100 (11,950 ) 0.5
Net current assets 4,469 0.5
230,699
Financed by:
Capital
Balance as at 1 May 2008 237,740 0.5
Add Net profit for the year 44,935 0.5
282,675
Less Drawings ($51,480 + $496) (51,976 ) 0.5
230,699
QUESTION 9
The following is a summary of Judy Ku's bank account for the year ended 30 June 2012.
Bank
$ $
Balance b/f 138,800 Accounts payable 122,200
Accounts receivable 136,002 Carriage inwards 8,562
Bank interest revenue 3,425 Drawings 7,595
Commissions revenue 13,695 Water and electricity 5,744
Wages 29,885
Sundry expenses 1,198
Balance c/f 112,628
291,922 291,922
Additional information was available on 30 June 2012:
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(i) $
Accounts payable 114,244
Accounts receivable 222,616
Capital as at 1 July 2011 219,573
Cash 16,130
Inventory as at 30 June 2012 13,905
Inventory as at 1 July 2011 9,525
Plant and machinery 104,230
Purchases 203,561
Returns inwards 2,799
Returns outwards 1,250
Sales 376,396
(ii) Prepaid water charges amounted to $100.
(iii) Rent owing amounted to $190.
(iv) Electricity charges of $50 were owing.
(v) Sundry expenses of $340 were accrued.
Required:
Prepare for Judy Ku an income statement for the year ended 30 June 2012 and a balance sheet as at that date.
(14 marks)
Question Bank
Answer:
Judy Ku
Income Statement for the year ended 30 June 2012
$ $ $ $
Carriage inwards 8,562 0.5
212,123
220,398
373,597 373,597
Water and electricity ($5,744  $100 + $50) 5,694 Gross profit b/d 167,104 0.5 0.5
Rent and rates ($4,110 + $190) 4,300 Bank interest revenue 3,425 0.5 0.5
Wages 29,885 Commissions revenue 13,695 0.5 0.5
Sundry expenses ($1,198 + $340) 1,538 0.5
184,224 184,224
Judy Ku
Balance Sheet as at 30 June 2012
$ $ $ $
Plant and machinery 104,230 Balance as at 1 July 2011 219,573 0.5 0.5
Inventory 13,905 Less Drawings (7,595 ) 0.5 0.5
Accounts receivable 222,616 354,785 0.5
Prepaid expenses 100 Current liabilities 0.5
Bank 112,628 Accounts payable 114,244 0.5 0.5
Cash 16,130 365,379 Accrued expenses 0.5
($50 + $190 + $340) 580 114,824 0.5
469,609 469,609
QUESTION 10
The trial balance of Stephen Chow’s business as at 12 October 2011 is shown below:
Stephen Chow
Trial Balance as at 12 October 2011
Dr Cr
$ $
Accounts payable 66,885
Accounts receivable 198,120
Bank overdraft 61,945
Capital at 1 November 2010 371,575
Cash in hand 2,220
Discounts allowed 20,640
Discounts received 12,090
Carriage inwards 16,920
Question Bank
Drawings 31,800
Premises 251,100
Inventory at 1 November 2010 15,060
Purchases 212,040
Sales 392,665
Wages and salaries 151,680
905,160 905,160
During the rest of October 2011, the following transactions were made:
2011 $
Oct 13 Cash sales 69,405
“ 16 Credit purchases 47,550
“ 17 Settled the amount owing to a supplier by cheque 15,025
“ 20 Paid wages by cheque 4,000
“ 21 Cash received from a customer 25,000
“ 25 Stephen took cash from the business for his private use. 11,500
“ 28 Stephen took goods from the business for his private use. 5,000
“ 30 Cash banked 76,150
Inventory as at 31 October 2011 was valued at $10,885.
Required:
(a) Draw up the trial balance as at 31 October 2011. (8 marks)
(b) Taking into consideration the following additional information, prepare for Stephen Chow an income
statement for the year ended 31 October 2011 and a balance sheet as at that date. (12 marks)
Additional information as at 31 October 2011:
(i) Wages of $3,500 were owed.
(ii) Half of the rent and rates were incurred by Stephen's private apartment.
(iii) Carriage inwards of $2,000 was prepaid.
Answer:
(a)
Stephen Chow
Trial Balance as at 31 October 2011
Dr Cr
$ $
Accounts payable (W1) 99,410 0.5
Accounts receivable (W2) 173,120 0.5
Question Bank
Bank overdraft (W3) 4,820 0.5
Capital at 1 November 2010 371,575 0.5
Cash in hand (W4) 8,975 0.5
Discounts allowed 20,640 0.5
Discounts received 12,090 0.5
Carriage inwards 16,920 0.5
Drawings (W5) 48,300 0.5
Premises 251,100 0.5
Inventory at 1 November 2010 15,060 0.5
Purchases (W6) 254,590 0.5
Sales (W7) 462,070 0.5
Rent and rates 5,580 0.5
Wages and salaries (W8) 155,680 0.5
949,965 949,965 0.5
Question Bank
Workings:
(W1) $66,885 + $47,550  $15,025
(W2) $198,120  $25,000
(W3) $61,945 + $15,025 + $4,000  $76,150
(W4) $2,220 + $69,405 + $25,000  $11,500  $76,150
(W5) $31,800 + $11,500 + $5,000
(W6) $212,040 + $47,550  $5,000
(W7) $392,665 + $69,405
(W8) $151,680 + $4,000
(b)
Stephen Chow
Income Statement for the year ended 31 October 2011
$ $ $
Carriage inwards
($16,920  $2,000) 14,920 269,510 0.5
284,570
462,070 462,070
Discounts allowed 20,640 Gross profit b/d 188,385 0.5 0.5
1
Rent and rates ($5,580 × 2 ) 2,790 Discounts received 12,090 0.5 0.5
Wages and salaries ($155,680 + $3,500) 159,180 0.5
200,475 200,475
Stephen Chow
Balance Sheet as at 31 October 2011
$ $ $ $
Premises 251,100 Balance as at 1 November 2010 371,575 0.5 0.5
Inventory 10,885 Less Drawings (51,090 ) 0.5 0.5
Accounts receivable 173,120 ($48,300 + $2,790) 338,350 0.5
Prepayments 2,000 0.5
Cash 8,975 194,980 Current liabilities 0.5
Accruals 3,500 0.5
Bank overdraft 4,820 107,730 0.5
446,080 446,080
Question Bank

Chapter 1 Accruals and Prepayments: Required

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Chapter 1 Accruals and Prepayments: Required

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Chapter 1 Accruals and Prepayments

The following additional information was ascertained:

(ii) Insurance included:

“ 31 Accrued c/f 4,680 0.5

“ 31 Accrued c/f 1,200 0.5

“ 31 Prepaid c/f 1,500 0.5

Insurance 4,033 0.5

Loan interest 2,400 0.5

Unearned revenues 1,500 0.5

Oct 1 Bank 6,480 0.5

Sept 1 Bank 3,600 0.5

Dec 1 Bank 3,600 0.5

Sept 1 Bank 1,956 0.5

Dec 1 Bank 2,208 0.5

Rates 12,240 0.5

Rent 13,680 0.5

Telephone and Internet 7,600 0.5

Mar 31 Bank 150,000 “ 31 Prepaid c/f 1,000 0.5 0.5

Apr 5 Bank 4,000 0.5

Jun 30 Bank 150,000 0.5

Sept 30 Bank 150,000 0.5

Dec 31 Bank 150,000 0.5

Water and Electricity

“ 31 Accrued c/f 350 “ 31 Prepaid c/f 200 0.5 0.5

Other Operating Expenses

“ 31 Accrued c/f 1,000 0.5

Insurance 5,700 Net loss 494,600 0.5 0.5

Water and electricity 8,150 0.5

Other operating expenses 12,000 0.5

(ii) Larry & Co sublet part of the building to three tenants:

Jun 2 Bank 12,000 0.5

Oct 28 Bank 12,000 0.5

Dec 31 Accrued c/f 4,000 0.5

Nov 1 Bank 1,500 0.5

Dec 1 Bank 14,400 0.5

Dec 31 Bank 15,300 “ 31 Prepaid c/f 4,000 0.5 0.5

“ 31 Bank 4,000 0.5

Prepaid expenses 4,000 Accrued expenses 4,000 0.5 0.5

Unearned revenues 11,300 0.5

Inventory as at 30 April 2011 was valued at $6,440.

Accounts receivable 7,250 0.5

Accounts payable 1,380 0.5

5% bank loan (repayable in 2015) 3,000 0.5

Office furniture 1,466 0.5

Discounts allowed 1,424 0.5

Discounts received 586 0.5

Fixtures and fittings 1,256 0.5

Purchases 19,804 0.5

Sales 34,224 0.5

Returns inwards 1,592 0.5

Returns outwards 858 0.5

Wages and salaries 6,202 0.5

Bank 1,570 0.5

Cash 146 0.5

Rates and insurance 564 0.5

Premises 12,574 0.5

Drawings 3,562 0.5

Rent 250 0.5

Inventory as at 1 May 2010 4,148 0.5

61,808 61,808 0.5 0.5

Motor expenses [$2,765 + ($6,730  10%)] 3,438 0.5

(b) (i) Gross profit ratio: $39,655 ÷ $88,130 = 45.00% (1 mark)

(b) (i) Gross profit ratio: $6,068 ÷ $116,076 = 5.23% (1 mark)